Saturday, July 28, 2007

A weak dollar isnt going to boost the economy.

This whole weak dollar is going to save the economy is laughable. The fed has two choices, inflate the dollar to keep the illusion of affordability for those who are about to go under, and allow the government and the folks who have way too much debt (no one should have any debt at all, maybe a house payment and that is it, no seconds or HELOCs) to try and pay the loan off with inflated dollars.

But this comes a high price.

1) If you make money, and your salary isn't being adjusted for inflation, the purchasing power of the dollar you get at work is simply going down all the time.

2) For those who save, or have positions indexed in dollars (stocks, etc), you lose.

So the way you trivialize debt is to trivialize all money.

Now since the world is more global, we have unnaturally cheap PRC Chinese goods keeping us afloat, but hard things like copper, gold, aluminum, steel, gas, food, etc, are all getting drastically more expensive while your salary stays the same.

If the PRC Chinese overheat and their prices start to rise from production cuts, or our M3 money supply shrinks due to housing and other paper-wealth that is leveraged, then we have a bad situation.

The fed needs to prevent deflation and prevent hyper inflation at the same time. Too much inflation and oil gets sold in Euros, not dollars. Lots of deflation mean lots of defaulting on loans.

This is what happens when people are allowed to screw up. The people learned this from Amtrak, American Airlines, the Savings and Loan industry, the GSEs and Chrysler.

Also, this weaker dollars leads to exports stuff only washes if you make a lot of stuff people want, and you get most of your raw materials to make things in your own country.

The USA only makes giant machines and Boeing aircraft, the rest of the crap the US sell is lawyer services, tax services and software (which is being commodities). If the crap hits the fan, the fan, the US doesn't make much that others need to survive. The US can be written off more easily that it thinks.

Also, if you are actually making electronics or high tech stuff here, world class hardware that cant be CMed out to Taiwan, Korea or PRC, then you pay your CMs more due to the weak dollar but you sell your product in dollars, which others can buy cheaply due to its weakness. Pay more for the raw materials due to a bad exchange rate, and "charge less" due to a bad exchange rate. Not good.

Its simple. If the dollar inflates 2x, and you 2x your sales without raising prices, you've done nothing. And if your buying raw materials from external countries, this complicates this even further.

People: focusing on fundamentals and making money and not "growing " is more important. This is how Warren Buffet got rich, and how Microsoft has 40 Billion in cash. While people paid way too much in the past for .coms for a chance at growth, the real investors try and focus on making money, making cash, increasing principal.

All you debt-jerks are really screwing it up for us realists who believe in making money not getting rich quick or "having your money work for you."